Crude Collapse Continues

Daily Analysis - 24/08/2015

Oil Benchmarks Trade Below Key Long-Term Support Levels

The collapse in base metals and energy products continues unabated as the global economic slowdown continues to spread across the world. Crude oil in particular has been hard hit as economic activity grinds to halt amid the uptick in hostilities from the ongoing currency war.

Energy Slide Persists

Amid growing concerns about the state of the global economy, the ongoing collapse in oil prices is testament to the difficulty encountered by Central Bankers as they attempt to stem the slide in financial assets and create ideal conditions for borrowing and growth. Much of the softness in global trade is emanating in Asia where plunging imports combined with softer economic activity is contributing to lessened demand for oil. Supply conditions remain problematic as evidenced by the most recent Iranian pledge to raise output in order to protect market share, further contributing to the prevailing oversupply problem. Brent crude oil has fallen below $45 per barrel for the first time since 2009 and WTI approaching the lows set back during the last financial crisis. The spread between the two benchmarks is collapsing once again with the difference between the Brent and WTI sliding to just over $5 points.

China Slide Accelerates

Many analysts had expected another form of policy easing from the People’s Bank of China over the weekend after last week’s intervention measures failed to keep financial markets elevated. Expectations of a reserve ratio cut failed to materialize, leading to a tidal wave of stocks halted, with over 2000 trading limit down. This is the biggest drop since the late 90s Asian financial crisis with the Shanghai Composite now trading negative year-to-date and regional benchmarks having the worst day in over four years. This movement coincides with a continued deceleration in global trade with freight and tanker rates across the globe continuing to plunge, led by rates between Asia and Europe which have fallen well below break-even levels. The drop in Chinese stocks is likely to be echoed globally as the weakness in stocks extends to Europe and other asset classes including commodities and futures.

Japan Holds Off on Expanded Stimulus

The Bank of Japan has chosen to stay the course with current monetary policy activities despite missing inflation targets set by the Central Bank and Abe Administration. Speculation of expanded monetary easing measures was met with disappointment as the Bank of Japan keeps existing quantitative and qualitative easing measures intact as the Japanese economy approaches its fifth recession in six years. The country is facing a host of problems including weaker key performance indicators and zero wage growth for years which has hurt consumers as inflation and Yen weakness eat away at disposable income and spending. In concert with the weakness across the sea in China, investors are growing increasingly concerned that the Central Banks are beginning to lose control of their heavily indebted economies, adding to pressure on policymakers to expand stimulus and loosen financial conditions further. USDJPY continues to give ground, rapidly approaching the key 120 support level.

GBPUSD Equidistant Channel Technical Pattern

The Pound continues to strengthen as improved economic fundamentals coupled with an extended timeline for the Federal Reserve to experience liftoff have contributed to the recent trend higher. The Bank of England is examining the potential for raising rates in the beginning of 2016 as the economy grows at the fastest pace in years, unencumbered by inflation but nevertheless risking potential deflation. With GDP numbers due from both the US and UK later in the week, the persisting trend is expected to remain intact until further data is made available. The upward trending equidistant channel formation emerging in GBPUSD has a bullish bias with ideal positions taken at the lower channel line targeting the upper channel line for an exit. A move below the lower channel line could be indicative of a potential channel-based breakout to the downside accompanied by renewed momentum downwards.